In terms of static economic analysis,if a customs union results in a large amount of trade creation relative to trade diversion,world welfare
A) increases
B) decreases
C) does not change

Question

Quizplus · Accepted Answer

In static economic analysis, a customs union can result in both trade creation (increased trade among member countries due to lowered trade barriers) and trade diversion (reduced trade with non-member countries due to the formation of a common external tariff). If the amount of trade creation is larger than the amount of trade diversion, then world welfare increases. This is because the gains from increased trade within the customs union outweigh the losses from reduced trade with non-member countries. Therefore, the best choice is A) increases.

In Terms of Static Economic Analysis,if a Customs Union Results